Melco International Development (HKG:200) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Melco International Development Limited (HKG:200) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Melco International Development

How Much Debt Does Melco International Development Carry?

As you can see below, at the end of June 2023, Melco International Development had HK$66.9b of debt, up from HK$64.2b a year ago. Click the image for more detail. However, it also had HK$11.8b in cash, and so its net debt is HK$55.1b.

How Strong Is Melco International Development's Balance Sheet?

According to the last reported balance sheet, Melco International Development had liabilities of HK$8.31b due within 12 months, and liabilities of HK$73.5b due beyond 12 months. Offsetting these obligations, it had cash of HK$11.8b as well as receivables valued at HK$695.5m due within 12 months. So its liabilities total HK$69.4b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$8.73b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Melco International Development would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Melco International Development can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Melco International Development wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to HK$18b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Melco International Development still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$2.9b. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the fact is that it incinerated HK$1.4b of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So is this a high risk stock? We think so, and we'd avoid it. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Melco International Development is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.